You can be cautious when investing in companies with high price-earnings ratios, as some benchmarks are hitting all-time highs. But that kind of thinking could cost you money. Companies with high P / E valuations can continue to increase sales quickly, increasing profits in the process. And that could lead to higher share prices, even though the S&P 500 SPX, -0.10% hit a new intraday high on April 6 and the Nasdaq COMP, -0.05% hit a new high on February 19.
(Set of facts)
Those forward P / E ratios (based on 12-month consensus estimates among analysts surveyed by FactSet) have always been high for Amazon, compared to the SPDR S&P 500 ETF Trust SPY, -0.06%, and the Invesco QQQ Trust QQQ. . , -0.07% (which tracks the Nasdaq-100):
(Set of facts)
The anticipated P / E valuations of the two ETFs are much lower than Amazon’s, although they have moved considerably higher in the past two years. You may have been warned to stay away from Amazon shares at any time since the e-commerce company’s IPO in 1997. That would have been a mistake, as the stock market has rewarded the rapid growth of sales with high P / E valuations. As with Amazon, a company’s earnings can be misleading when conducting valuation research. Earnings can vary widely, especially if a company emphasizes reinvestment in the business rather than showing profit. Amazon’s annual revenue increased at a compound annual growth rate of 29% from 2015 to 2020. The company posted annual earnings during those periods, but as recently as 2014 it reported a net loss of $ 241 million on net sales of $ 89,000. millions. High Price / Earning Stocks The Nasdaq-100 is comprised of the top 100 companies in the Nasdaq Composite Index by market capitalization, excluding financial companies. That means it leans heavily toward tech companies and other fast-growing producers. The screen below is based on consensus sales estimates among analysts surveyed by FactSet through calendar 2023, but excludes 11 for which 2023 estimates are not available. The screen also excludes companies that are expected to show declines in annual sales or net losses during 2021, 2022 or 2023. That reduces the initial list to 77 companies. Here are the 25 expected to achieve the highest compounded annual growth rates for sales over the next three calendar years, with their current P / E ratios and current price ratios for 2023 and earnings per share estimates for 2023. :
(Set of facts)
Continuing the Amazon discussion, you can see that analysts expect the company’s sales growth rate to slow to an annual pace of 19% over the next three years, but that’s still a very impressive growth rate if it keeps. And the ratio of the company’s current share price to 2023 estimated EPS is 34.8, which is not outrageously high for a fast grower. Taking the list above, for MercadoLibre Inc. MELI, + 2.95% and Peloton Interactive Inc. PTON, + 5.77%, you can see that two-year future P / Es based on current prices still appear very high, at same as those of Zoom Video Communications Inc ZM, + 1.80%. and Tesla Inc. TSLA, + 0.08%. Possible offers for long-term patient investors include Advanced Micro Devices Inc. AMD, + 0.01%, Facebook Inc. FB, -0.86% and even Netflix Inc. NFLX, + 0.71%, which has been always expensive. But that’s when you need to do your own research. Don’t Miss: This Fund’s ‘Long-Short’ Equity Strategy Helps Investors Navigate Tough Times